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July 2011

July 29, 2011

A Chicago federal court denied a TRO in a Lanham Act case between rival hot dog companies -- operated by different members of the same famous hot dog family. The court balanced the right to truthfully associate oneself with “family tradition” against the harm from trading on a competitor’s reputation. The Plaintiff is Chicago’s famous Vienna Beef (which controls 75% of the market); the defendant is Red Hot Chicago, Inc., run by the grandson of Vienna Beef’s founder. At issue was the grandson’s attempt to use advertising statements about his family’s “118-year tradition” of hot dogs and sausages in Chicago. The court denied the TRO on two main grounds: (1) acquiescence (most of the challenged advertising had been running for years); and (2) the absence of extrinsic evidence to demonstrate consumer confusion.Background. Vienna Beef was founded after the Ladany family sold sausages at the 1893 Columbian exposition in Chicago. Grandson Scott Ladany worked for Vienna Beef for 12 years, left the company, waited out his 2.5 year non-compete, and then formed rival Red Hot Chicago. Ladany recently began to advertise Red Hot Chicago with statements about “our family,” including the “family recipe,” and the “118 years” that the family has been in the business.

Vienna Beef’s Implied Falsehood Claim. In its brief, Vienna argued both literal and implied falsity, but the claim appeared to rest more on the latter: “Each separate statement” is “crafted to work in conjunction” with the others, to “convey” (i.e., “imply”) a “single, false conclusion” -- that the grandson, by virtue of his status “as a member of the Lanady family … is carrying on the Vienna tradition.” As Vienna Beef’s CEO stated, “We’re concerned that he is attempting to mislead people into thinking that he is part of our organization or we’re a big happy family.”

TRO Denied. The TRO was denied based chiefly on delay -- defendant was able to show that almost all of the challenged phrases were in use for years, which, at a minimum, undermines the urgency necessary for a TRO. In addition, the court found that the advertising statements were “literally true” and that Vienna’s real argument -- that the ads “conveyed a false impression” -- was a nonstarter because the plaintiff failed to present evidence of consumer confusion. The court also disapproved of plaintiff’s related trademark claims, such as use of the phrases like “make me one with everything,” and “drag it through the garden,” holding that such phrases were used “descriptively” to describe a hot dog with all of the toppings.

Significance for practitioners. Practitioners should recommend against bringing emergency TRO motions for promotional statements in use for a long period of time. Courts don’t like this. The result might have been different with a slower-paced and fully-developed preliminary injunction hearing. In addition, plaintiffs should present extrinsic evidence of actual consumer confusion or deception before arguing that a claim, although literally true, creates a false impression. The plaintiff here committed both errors with the result being that this “family beef” was decided in favor of Red Hot Chicago.

The promotion had advertised a tonic for restoring health and vitality and garlic and Echinacea herbal tablets described as anti-catarrhal, anti-inflammatory and stimulating the immune system. Also advertised were own-brand homeopathic sachets “for the symptomatic relief of teething pain” and tablets for “coughs, colds and chestiness”. The complaint challenged whether the efficacy claims for the featured products were misleading and could be substantiated. Boots responded to the complaint saying that all four products were licensed medicines and that the claims made were consistent with (as applicable) wording approved by the UK’s Medicines and Healthcare products Regulatory Agency (MHRA), the Product License of Right (PLR) indications and/or the Summary of Product Characteristics (SPCs). The ASA agreed, noting that the applicable advertising code required medicinal products to be registered or licensed in the UK and to confine information given in marketing communications to that which appeared on the product label, SPC or PLR. It was satisfied that the claims in Boots’ online promotion were consistent with those approved claims.

This decision shows that when health benefit claims are made in respect of licensed medicines, the ASA will limit its consideration to whether the claims in the ad conform with claims approved by the appropriate regulatory authority or its predecessors, without looking for evidence that the claims themselves are appropriate.

Stokely-Van Camp, Inc., the maker of Gatorade, recently brought claims before NAD alleging that the Electric Beverage Company was making unsupported comparative claims. The maker of Gatorade challenged several advertising claims, including claims that Title had more electrolytes and less calories and sugars than Gatorade. They also challenged advertisements that implied that Title allowed players to heal more quickly and that the colorants in Gatorade are harmful.

In response to Gatorade’s challenge, the Electric Beverage Company voluntarily removed or modified some of its claims, including discontinuing the advertisements suggesting that the colorants in Gatorade are harmful and the Terrell Owens commercial implying that Title is why “I play hurt when others sit.”

However, the NAD also found that Title’s claims that its product had five times more magnesium and potassium” than Gatorade and that it has “twice the electrolytes” of Gatorade, while perhaps literally true, implied a superior performance benefit. NAD recommended that Title make only “monadic” claims (e.g. “___ amount of potassium and magnesium”). The NAD’s decision in this case serves as a good reminder that when it comes to advertising claims “truth” is not always a defense.

July 26, 2011

On July 19, 2011, the US Consumer Product Safety Commission (CPSC) issued a final rule determining that CPSC will consider certain children’s garments with drawstrings to present “substantial product hazards” under the Consumer Product Safety Act. The affected garments are children’s upper outerwear (e.g., jackets, sweatshirts) that do not meet the applicable ASTM F 1816-97 industry standard because the garments:

are sized 2T to 12 or the equivalent, and have neck or hood drawstrings; or

are sized 2T to 16 or the equivalent, and have waist or bottom drawstrings that (a) extend more than three inches out of the drawstring channel when the garment is expanded to its fullest width, (b) are not “bartacked” at the midpoint so the string cannot be pulled through its channel, or (c) have toggles or knots at the end.

CPSC has concluded that such drawstrings can catch or become entangled with objects, such as a car door or playground slide, posing dragging or strangulation hazards to children.

That part of the final rule is not news, as CPSC has long addressed drawstrings on children’s upper outerwear. In 1996, CPSC issued recommended drawstring guidelines, which were incorporated a year later into the ASTM industry standard (ASTM F 1816-97). In 2006, CPSC’s Office of Compliance announced that children’s upper outerwear not meeting the industry standard would be regarded as presenting a “substantial risk of injury to young children” and thus as reportable under section 15 of the Act. CPSC has since announced more than 100 drawstring recalls, and CPSC has penalized dozens of companies for allegedly failing timely to notify CPSC under section 15. For example, on July 11, 2011, CPSC announced that a major retailer agreed to pay a civil penalty of $750,000 for such alleged reporting violations.

What may come as a surprise is that CPSC has also chosen to view “ties” as “drawstrings,” even if they do not pass through a channel. As Chairman Inez Tenenbaum noted in her signing statement, the common industry understanding has been that ties that do not pass through a channel are outside the scope of the industry standard. That understanding is consistent with the language of the standard itself, which references a “channel” in the definitions of “bartack” (3.1.1) and “toggle” (3.1.7), and in the performance requirement that drawstrings at the waist not extend more than three inches “outside the drawstring channel” (4.2.1). However, CPSC states in the preamble to the final rule that the ASTM definition is not “limited to cords, ribbons, or tapes that pass through a channel” and “does not exclude ties.” Further, according to Chairman Tenenbaum’s statement, CPSC “long has understood that such ties are drawstrings [as] evidenced by our recall and other enforcement efforts,” and the Commission believes that “ties pose the same risks [as drawstrings] regardless of whether they pass through a channel.”

Thus, companies face recalls and late reporting penalties for children’s upper outerwear with drawstrings -- including ties that do not pass through a channel.

July 25, 2011

A recent study by Stanford University’s Center for Internet and Society has found that only a handful internet advertising companies participating in the self-regulatory Network Advertising Initiative (NAI) actually cease tracking user browsing habits after users request to opt-out of a member company’s targeted advertising. The researchers found that not only did half of the 64 companies they studied keep tracking software in place after users opted out, but eight NAI members even did so after expressly promising not to.

NAI touts itself as a voluntary and effective alternative to governmental regulation of online advertisers that use behavioral technology to “target” consumers with ads based on their browsing patterns. The NAI website offers its own “opt out” tool that allows users to detect and eliminate tracking software on their computers. However, NAI executive director Chuck Curran has criticized the Stanford study as failing to distinguish between a policy of not tracking any online browsing, something the Stanford researchers advocate, and NAI’s voluntary “self regulatory commitments to limit ad targeting based on user interests.” In other words, NAI distinguishes between, on the one hand, collecting data on browsing patterns, and, on the other hand, acting on that data by targeting ads at individual users tailored to their interests. The NAI website also reminds readers that “most content on the Internet” is free because of effective online advertising.

However, web tracking is receiving increased attention from more than the industry itself. The FTC has signaled that it will regulate tracking behavior it finds deceptive or egregious, such as a 2009 action in which the agency censured a retailer for paying users of its website $10 in exchange for installing software on their systems that the retailer did not disclose would track virtually everything the users did on their computers.

Online advertisers are also facing threats from their client websites. The Wall Street Journal recently reported that a company called Ensighten is promising website owners software that will allow them to dictate what information online advertisers can track about browsers of their websites. This software purports to allow website owners to limit tracking by those online advertising companies that “don’t have a strong privacy policy or follow industry standards.”

But, as the Stanford study indicates, even those online advertising companies with “strong” privacy policies do not necessarily limit their tracking of user data the way users likely think they do. So, much uncertainty remains about what “industry standards” for online advertisers actually are, and the success of self-regulation like NAI remains unclear.

July 23, 2011

Maureen Ohlhausen Is Nominee for FTC Commissioner, Says Obama Administration The Obama administration announced its intention today to nominate Maureen Ohlhausen as the next FTC Commissioner. Ohlhausen, currently a partner with Wilkinson Barker Knauer, LLP, would replace outgoing Commissioner Bill Kovacic, who finishes his term in September of this year. Ohlhausen is no stranger at 600 Pennsylvania Avenue; her prior tour of duty included serving as Director of the Office of Policy Planning (OPP) and as attorney advisor to former Commissioner Swindle. Her prior personal experience with how business is done at the commissioner and the staff level should be an asset. Also for those who track such things this would mark the first female majority at the Commission level since 1997.

While Kovacic is a strong antitrust academic, Ohlhausen is a practicing lawyer experienced in issues of privacy and consumer protection. During her tenure, the OPP repeatedly encouraged informative labeling and advertising meant to better inform consumers, as well as clearer disclosure by mortgage lenders and pharmaceuticals. This reflects the growing focus by the FTC on consumer protection issues. With the Consumer Financial Protection Bureau launching as another agency watchdog on the consumer financial landscape, the consumer protection side of the Commission will clearly not be taking a vacation; instead, it is gearing up with a commissioner likely more interested in taking an active role in directing staff priorities rather than sitting back to see what staff puts on her desk.

Ms. Ohlhausen previously served as a clerk to Judge David Sentelle (D. C. Cir.) and to Judge Robert Yock (Fed. Cl.). She received a B.A. from the University of Virginia and a J.D. from George Mason University School of Law, and has since taught Unfair Trade Practices as an adjunct professor at her alma mater. Ms. Ohlhausen has also contributed academically to the analyses of the relationship between advertising and childhood obesity.

As this blog has discussed previously, the FTC is an independent agency led by five commissioners who each serve staggered seven-year terms. Although nominated by President Obama, Ohlhausen would fill one of the slots reserved for a Republican or independent-- no more than three sitting commissioners may belong to the same political party --as the FTC currently has three Democratic members in the form of Commissioners Julie Brill, Edith Ramirez, and Jon Leibowitz. J. Thomas Rosch rounds out the current roster of Commissioners.

July 22, 2011

With over 350,000 apps available through the leading online retailer of mobile Apps, it’s not surprising that, like everyone else, FDA wanted a piece of the action. On Tuesday, FDA announced the availability of a Draft Guidance document outlining how it intends to regulate “mobile medical apps” - a new term of art for the telehealth industry. The Draft Guidance is the latest in a growing list of statements and rules, including the recent announcement of its Medical Device Data Systems (MDDS) Final Rule , that describe FDA’s regulatory framework for software, hardware, and IT solutions that perform or facilitate health or medical functions. Although FDA does not have an overarching regulatory policy regarding computer software, it has determined that in some circumstances, software solutions are medical devices. In the case of mobile apps, some of those, too, will require FDA scrutiny.

Congress has defined a medical device as, among other things, any instrument, apparatus, implement, or machine that is intended:

for use in the diagnosis of disease or other conditions; or

for use in the cure, mitigation, treatment, or prevention of disease; or

to affect the structure or any function of the body.

A mobile app is regulated as a mobile medical app when meets the definition of a medical device and either:

is used as an accessory to a regulated medical device; or

transforms a mobile platform (such as a smart phone or tablet computer) into a regulated medical device.

Before you start to think that just about everything on your new smart phone is now an FDA-regulated product, FDA has carved out certain apps that it does not consider to be within the scope of its Draft Guidance. FDA included mobile versions of educational texts or reference manuals, such as the Physician’s Desk Reference, among the examples of apps that it does not intend to regulate as mobile medical apps. Some of the fitness buffs among our subscribers may be interested to know that apps that log or track fitness goals, provide general health or fitness recommendations, or monitor and count our calories are also not considered mobile medical apps. The same can be said for apps that help with electronic medical records or personal health record systems, and apps that automate general office operations such as scheduling appointments, billing, and the dreaded insurance transactions.

Examples of apps that are regulated as medical mobile apps include:

apps that display patient-specific data, such as MRI scans or X-rays, for physicians’ review;

apps that work in concert with an insulin pump to monitor and control the delivery of the proper dose of insulin;

apps that utilize smart phones to acquire medical data and draw conclusions from that data; and

apps that analyze patient-specific data to assist in the care of a patient or to recommend a specific treatment action.

In determining both whether a solution is a mobile medical app and the degree of regulatory oversight that will apply to devices that are mobile medical apps, FDA will consider how the app is being used and marketed. For devices that meet the definition of a mobile medical app, the degree of oversight will depending on issues such as the level of integration or connection between the app and other medical devices, the device-to-device connections, and, of course, the labeling, marketing and promotional materials for the product or solution. FDA intends to require general controls (such as registration, listing, manufacturing quality systems, and adverse event reporting) for all mobile medical apps. If, however, the app performs functions that are similar to currently regulated medical devices or functions that are critical to patient diagnosis or treatment decisions, FDA may require greater oversight, including premarket review in the form of a 510(k) or premarket application (PMA), along with other “special controls” that FDA deems necessary to assure the safety and effectiveness of a particular device.

FDA is still deciding how it will handle apps that are intended to function with multiple types of medical devices or integrate information from several different sources or types of medical devices. The agency is soliciting comments from the public on this and other issues to clarify its approach to regulating mobile apps. Stay iTuned for further details.

For more information on FDA’s regulation of mobile apps and Health IT solutions, see our advisories on the Draft Guidance and the MDDS rule.

July 21, 2011

Late last month, Judge Seeborg dismissed Cohen v. Facebook, Inc., a class action suit brought in the Northern District of California. Cohen involved one of Facebook’s newest services, Friend Finder, which provides suggested new “friends” to current Facebook users. Friend Finder searches users’ email databases for new contacts and common contacts among users. Friend Finder then solicits new users and suggests new friends to current users, increasing the Facebook network. Facebook promotes the service by displaying the names and photos of users who have purportedly found new friends via Friend Finder on its website. The Cohen decision will allow Facebook to continue promoting its Friend Finder service for the foreseeable future, but leaves open the door for future claims of misappropriation and perhaps false endorsement and unfair competition.

Plaintiffs in Cohen alleged that Facebook used their names and likenesses without consent or knowledge to advertise Friend Finder, thus increasing the Facebook network and boosting commercial advertisement sales. Plaintiffs brought suit alleging misappropriation in violation of the common law right to privacy and Cal. Civ. Code § 3344 , as well as false endorsement in violation of section 1125(a)(1) of the Lanham Act and unfair competition under Cal. Bus. Code. § 17200 .

In its motion to dismiss, Facebook argued that plaintiffs consented to the use of their names and likenesses as part of Facebook’s terms and conditions. Although the court ultimately dismissed all four counts with leave to amend, it refused to accept that plaintiffs had consented to the use of their names and likenesses for an endorsement of a Facebook service. Rather, the court relied on plaintiffs failure to allege any injury, noting that had they at least pled mental anguish the misappropriation claims might have gone forward. The Cohen court also dismissed the claims of false endorsement and unfair competition due to the plaintiffs lack of “commercial interest” in their names and likenesses, noting that it was “not clear how this defect could be cured” for future claims (absent adding Brad Pitt or Angelina Jolie as plaintiffs.) Thus, future plaintiffs may have viable claims against Facebook for its promotion of Friend Finder under a misappropriation theory, but claims of false endorsement and unfair competition appear to be limited to celebrities.

July 20, 2011

Tomorrow, exactly one year after the passage of the Dodd-Frank Act, the Consumer Financial Protection Bureau officially becomes a new cop on the consumer “banking beat,” responsible for enforcing the laws on credit cards, mortgages, student loans, prepaid cards, and other kinds of financial products and services. But as it opens its doors, it does not have the full force that many hoped or expected.

Only Monday, President Obama finally nominated a director for the CFPB, and it was not Elizabeth Warren, who envisioned the agency and its powers, and spent the last year setting it up. Rather, it was former Ohio Attorney General Richard Cordray ─ the CFPB’s current Assistant Director for Enforcement and one who is seen as an effective consumer advocate. However, Cordray’s confirmation is likely to be highly contested and may not move at all. In fact, dozens of Republican senators have announced their intent not to confirm any nominee, unless substantial changes are made to the CFPB, including turning it into a five-member commission ─ setting up the possibility of a controversial recess appointment.

Without a confirmed director at its helm, the CFPB will not be able to exercise all of the powers provided to it by the law. For example, the CFPB may not start supervising non-bank providers of consumer financial products until a director is in place. Yet many believe that it is these non-bank providers ─ i.e., payday lenders, student lenders, nonbank mortgage companies, and auto lenders ─ that most need federal oversight.

July 19, 2011

On June 29, 2011, the Office of the Comptroller of the Currency (OCC) issued a bulletin to national banks focusing on their obligation to assess and manage the risks associated with what the OCC calls prepaid access programs. The OCC defines “prepaid access” as a wide range of devices that provide consumers with access to money electronically, including general purpose reloadable cards, payroll cards, government benefit cards, retail gift cards, mobile phones, and Internet sites. The Bulletin states that it applies to any other electronic devices or vehicles that are in use or may be developed in the future. Because the other federal banking agencies have not issued similar guidance, the Bulletin imposes expectations on national banks that are not imposed on other banks, although the guidance will also apply to federal savings banks as of July 21, 2011.

While prepaid access devices are attractive to banks because they can be marketed to a broad range of persons that are not usually bank customers, the OCC is concerned that they can also increase a national bank’s risks if not implemented appropriately.

Thus, the Bulletin reminds national banks that offer prepaid access devices to consumers that they should have a comprehensive risk management program that identify, measure, monitor, and control the risks related to those products. The program also should clearly assess how prepaid access devices fit within its overall business strategy and risk appetite. Additional components of such a program include:

Policies and procedures to govern the program, including a due diligence process for selecting third-party service providers;

Policies and procedures to ensure that disclosures to consumers about pricing, fees, transaction limits, and other program requirements and restrictions are clearly outlined;

Robust audit and compliance functions; and

Parameters for reporting to the bank’s board of directors.

For example, the Bulletin reminds banks that their arrangements with third-party service providers that often market these products should be governed by a well-constructed, enforceable service contract that clearly defines the rights and obligations of each party, as required by the OCC’s policies on use of third party service providers.

The Bulletin also states that national banks should ensure that the audit and compliance functions provide for sufficient consumer protection transaction testing (i.e. fees and disclosures), and BSA/AML and OFAC compliance. The program should also include procedures to evaluate any proposed changes or additions to the product prior to implementation.

The Bulletin finally outlines the duties of the national bank’s board of directors with respect to these programs, including receipt of periodic reports from bank management that allow the board to determine whether the prepaid access program is operating within established risk limits.

While the OCC is the only agency issuing such guidance to date, the guidance in the Bulletin is very broad and essentially is covered by more generic agency guidance such as the guidance for third party service providers. See Financial Institution Letter 44-2008, Guidance for Managing Third Party Risk (June 6, 2008). Thus, while the issuance continues to show agency concern over prepaid access generally, it does not really break new ground in the area. However, with the CFPB scheduled to take over responsibilities for this area this week, stay tuned for more substantive developments in the near future.

July 18, 2011

The Better Business Bureau’s Children’s Advertising Review Unit (CARU) recently recommended that Paramount Pictures discontinue the use of a commercial for Justin Bieber’s autobiographical film Justin Bieber: Never Say Never (which reportedly only covers 20l0, not all 17 years of his life). The decision highlights that CARU will focus primarily on whether it believes an ad message is misleading to a young audience and will not necessarily take into account factors such as whether the ad has been discontinued, was in limited circulation, and was conveyed only in a single ad of a much larger ad campaign.

The commercial at issue features a movie theater full of Bieber fans who are about to see an advanced screening of the film, “or so they think,” hints the commercial’s announcer. “What they don’t know,” is that Bieber is pulling “the ultimate prank”. As the movie begins, Bieber bursts through the screen—in person—to the shrieks and squeals of fans (just shout whenever, and he’ll be there?). The ad touts that the movie is in 3D and fans "have never experienced him quite like this," with Justin gushing, "I have the greatest fans in the world. I hope you enjoy this movie about my life and my journey." The commercial ends with the announcer pondering that the audience is probably “okay” with being “pranked,” and Bieber himself chimes in: “This could happen in your theater.”

CARU did not think it could. The problem, in the view of CARU, is that the commercial, would reasonably give the (wrong) impression that Bieber “would make live appearances at movie theaters where the commercial aired.” The claim was literally true—he did in fact make a few live appearances in Los Angeles (here and here) — but CARU believed the ad implied that fans outside of LA could reasonably hope for a similar sighting of their idol. CARU found the net impression of the ad to be misleading to its intended audience, the impressionable tween and teen girls who make Justin Bieber so popular. Even though this ad only aired for 12 days and represented less than 1% of the hefty ad spend for the film ads (which otherwise did not offer the potential for a live Bieber visit), CARU recommended Paramount not promise again that "this could happen in your theater.” As always when it reviews children’s advertising, CARU considered children’s “special vulnerabilities such as inexperience, immaturity, and lack of cognitive skills needed to evaluate the credibility of advertising.”

While it is true that ravid Beliebers might not have reason or judgment when it comes to their idol’s search for somebody to love . . . one less lonely girl, his fans would probably attend his concert film without the chance to actually meet him, so this short run ad probably had no material effect on them. For its part, Paramount disagreed with CARU’s opinion that the commercial was misleading to children, but it nonetheless agreed not to reUp the ad.

July 16, 2011

In an attempt to get off to a strong start, the Consumer Financial Protection Bureau (CFPB) warned the banking industry that, on July 21, it will begin supervising the 111 depository institutions that have total assets exceeding $10 billion for compliance with federal consumer protection laws. In guidance issued on July 12, the CFPB outlined the scope of its bank supervision program. Significantly, the CFPB stated that its examiners will review an institution’s products and services to determine whether they comply with consumer rules over their entire life cycle, including through development, marketing, sale, and management.

The CFPB also stated that it will conduct periodic examinations for most of the banks that it regulates and implement a year-round supervision program for the largest and most complex banks in the country. The CFPB stated that it will assess each institution’s ability to detect, prevent, and remedy violations that may harm consumers. It will evaluate an institution’s policies and practices for compliance with the consumer financial protection laws and regulations, and bring enforcement actions as necessary. It will also conduct fair lending reviews to detect and address potential discriminatory practices.

Managed out of satellite offices in Chicago, New York, San Francisco, and Washington, DC, the CFPB supervision team will initially be comprised of more than 100 members transferred from the other federal banking agencies. The CFPB expects that number to eventually rise to several hundred examiners. The CFPB anticipates that it will conduct its first round of on-site examinations in the coming weeks, after it coordinates with other regulators and finalizes its supervision plans. The CFPB will post its examination manual on its website with an invitation for feedback and suggestions. The CFPB stated that it will provide additional information to the 111 institutions by letter, and hold informational roundtables starting in August.

The Dodd-Frank Wall Street Reform and Consumer Protection Act gave the CFPB authority to exam and enforce the consumer financial protection laws against depository institutions with total assets exceeding $10 billion, and their affiliates. For all institutions with less than $10 billion in total assets, however, compliance with consumer financial protection laws will continue to be enforced by their primary federal regulators. For a more extensive discussion of the CFPB’s regulatory powers, click here.

Nondepository providers of consumer financial products and services also will be subject to federal supervision for the first time, but the CFPB’s power to start supervising such entities is constrained by the fact that a director has not yet been appointed. For more information about the CFPB’s supervision of nondepository entities, click here.

July 15, 2011

While there is no disputing Wal-Mart v. Dukes’ status as the premier class action decision of this past Supreme Court Term, the Court’s less publicized decision in Smith v. Bayer is also highly relevant to class action practice, particularly in the consumer protection field. In Smith, the Court curtailed the growing defense use of injunctions or collateral estoppel to prevent serial relitigation of class certification in new fora after an initial denial of certification.

Smith involved consumer protection claims against Bayer by purchasers of Bayer’s drug Baycol. A class action called McCollins was brought in West Virginia state court on behalf of a purported class of West Virginia purchasers; that litigation was removed to federal court, from whence it was transferred to an MDL in Minnesota. The Minnesota federal district court denied certification because the necessary showing of harm varied from purchaser to purchaser and therefore individual issues predominated over the common ones.

But Bayer’s victory in McCollins proved pyrrhic, as meanwhile a duplicative class action had been brought by a second West Virginia purchaser, Smith, in West Virginia state court, on behalf of the same putative West Virginia class. Unlike McCollins, Smith’s lawyers made that case removal-proof by naming in-state defendants, so it stuck in West Virginia. (Both McCollins and Smith predated the Class Action Fairness Act (CAFA), which now makes it somewhat easier to remove class actions from state to federal court.)

Faced with this repetitive litigation and the “heads I win, tails you lose” dynamic it creates, Bayer sought and obtained from the Minnesota federal court an injunction prohibiting Smith from continuing to prosecute the West Virginia case on behalf of the same class for which certification had been denied. This strategy had been used by other defendants facing complex multi-forum class litigation. It had enjoyed particular success in the Seventh Circuit, which recently barred lawyers from refiling the same deceptive advertising case against Sears in California on behalf of a new plaintiff after an Illinois district court had denied certification. (The Supreme Court has now vacated that ruling and returned it to the Seventh Circuit for reconsideration in light of Smith.)

But the Supreme Court, in a 9-0 opinion by Justice Kagan, has now removed this weapon from defendants’ arsenal. Its precise holding was that the Anti-Injunction Act barred the injunction against the West Virginia state case, but the implications of Smith transcend injunctions. The Court held more generally that the Minnesota denial of certification simply had no preclusive effect -- in an injunction context or any other -- because West Virginia’s state version of Rule 23, which would govern in the state case, might not necessarily be interpreted coextensively with Federal Rule of Civil Procedure 23, which the Minnesota court had applied in denying certification. This rationale may take on heightened importance after Wal-Mart, as state courts may not fall into line with the new standards the Supreme Court has enunciated for (b)(2) cases.

Further, and perhaps more important, the Court explained that Smith could not be bound by the Minnesota court’s denial of certification because Smith himself was not a party to the earlier proceeding. This treatment of the individual named plaintiff as the real party in interest may strike some who labor in the trenches of class action practice as quaint. In most damages class actions, the lawyers are really behind the case, and the named plaintiff -- who in a typical consumer case may have a claim of only a few dollars -- is recruited by those lawyers to play a purely nominal or symbolic role. It would be rare for such a named plaintiff to have decided on her own to bring a class action suit. And no one was arguing that Smith’s right to bring his own claim and recover for his own injury should be precluded, only that his lawyers should not be able to prosecute a class action that another court had already rejected.

The Court’s opinion in Smith notes that “[n]either Smith nor McCollins knew about the other’s suit.” But it is conspicuously silent on whether the same plaintiffs’ lawyers were involved in the two parallel cases, or the two cases were coordinated in some fashion -- as in the recent Seventh Circuit case involving Sears. The Court’s reasoning suggests it may view those questions as irrelevant. It looked just at the named plaintiffs themselves, with no footnote or concurring opinion reserving the possibility of preclusion if the same plaintiffs’ counsel were behind both cases. Further litigation will be needed to flesh out whether any such limiting principles apply to Smith. The Court seemed to see practical concerns about serial relitigation as mitigated by the increased removability of state court class actions under CAFA. But, not all state class actions are removable, and the plaintiffs’ bar has become increasingly adept in techniques to make them removal-proof.

So, after it is done licking its wounds from Wal-Mart, the plaintiffs’ bar may be emboldened by the new possibilities for recycling cases and relitigating certification that Smith seems to open up, particularly in state courts that may look more hospitable after Wal-Mart’s impact on federal Rule 23. Class action defendants should brush up on their Whack-a-Mole game.

July 14, 2011

The FTC Staff has long had a focus on deceptive weight loss claims, including a consumer education mission to urge buyers to maintain a “healthy portion of skepticism” when considering the claims of weight loss products, and a call to action urging media outlets to police against deceptive slim down claims, as well. Its most potent weapon in the diet wars is using its enforcement powers aggressively in going after marketers for making allegedly false and deceptive weight loss claims. With a recent settlement, the FTC has again stepped up its game, and any marketer of diet or wellness products should take heed.

Weight loss claims, like other health claims, require competent and reliable scientific evidence as support, and as we have reported, the FTC recently settled a matter with Iovate Health Sciences. where it defined such evidence as two controlled human clinical studies or the product or essentially equivalent product conducted by different researchers.

Recently, the FTC reached a settlement with Beiersdorf, Inc., the maker of Nivea My Silhouette! Redefining Gel Cream over advertisements in which Nivea allegedly implied the gel would reduce body size. This settlement has the same requirements as the Iovate settlement with the heightened definition of the required substantiation for weight loss claims.

In the complaint, the FTC claimed that Beiersdorf spread false or misleading representations about My Silhouette in a television advertisement and via sponsored results for Google searches relating to body size, like “stomach fat,” or “thin waist.” The My Silhouette television ad showed a woman finding her skinny jeans and discovering that they now fit. The internet ads stated “Nivea My Silhouette Can Reduce the Appearance of Your Curves!” What is interesting is what is not claimed. There is no express claim that this product will cause weight loss, let alone a promise of a significant reduction.

The proposed settlement prohibits Beiersdorf from representing that My Silhouette or a similar product applied to the skin promotes significant weight loss or body size reduction. As fencing in it further prohibits the company from claiming any drug, supplement or cosmetic causes weight or fat loss or any reduction in body size “through the use of a product name, endorsement, depiction, or illustration,” absent verification by two clinical studies. More generally, any claim Beiersdorf makes about the health benefits of any drug, supplement or cosmetic must be supported by reliable scientific evidence. Finally, the proposed settlement requires that the company pay $900,000 to the FTC.

As FTC Chairman Jon Leibowitz counseled, “The real skinny on weight loss is that no cream is going to help you fit into your jeans. The tried and true formula for weight loss is diet and exercise.” The real skinny for advertising lawyers is to take a very conservative and careful view as to what claims may fairly be implied by your ads. Iovate redefined the competent and reliable scientific evidence standard; this case makes clear that even fairly subtle implied claims may not escape the enforcement radar.

July 13, 2011

Last week the UK’s advertising regulator, the Advertising Standards Authority (ASA), criticised beer-maker Carlsberg UK Ltd for running a prize promotion promising that “everyone who buys a promotional pack will also be eligible to send off for a free pair of Carlsberg pint glasses...”. The promotion’s main prizes were fourteen 47” 3D TVs with accessories. Carlsberg had estimated the redemption rate for the pint glasses based on its previous promotion for England World Cup glasses, which proved to be a fivefold underestimate. The ASA acknowledged that the promotion stated “glasses available while stocks last”, but found that this did not relieve Carlsberg of their obligation to do “everything reasonable to avoid disappointing participants”. It considered that the previous competition had not been a sufficiently similar promotion to provide a reasonable basis for estimating demand, because the England World Cup glass promotion had been run in isolation from any other main prize; Carlsberg should have taken account of any uplift that the offer of the main prizes could have on sales and redemptions.

This decision demonstrates that advertisers running prize promotions should take care to properly estimate demand; the common caveat that the prizes were subject to stocks was clearly not enough to protect Carlsberg from breaching UK advertising rules on sales promotions and availability when its glass promotion proved to be far more popular than it expected.

July 12, 2011

The Southern District of California did an about-face after granting a TRO, and denied a preliminary injunction to stop Eli Lilly & Co from using the same 700-person sales force to market rival drugs. The court held that money damages would be adequate to remedy any loss if the plaintiff wins at trial. The forthcoming expedited appeal can be expected to shed light on a plaintiff’s burden to show irreparable harm for preliminary injunctions in the wake of the 2008 Supreme Court’s decision in Winter v. Natural Resources Defense Council, Inc., the core issue in the case -- and a crucial issue for practitioners.

The secret veil is now removed. The record in the case -- and even the names of the parties and counsel -- had been “sealed” until recently, but the case has received substantial attention based on the parties’ dueling press releases and “bootleg” copies of pleadings and court decisions in the blogosphere. With the case now unsealed, we can now see what the fuss is about.

Central to the motion to dismisswas whether data packets on private, unsecured networks constitute “radio communication.” The Wiretap Act creates a private right of action against interceptors of “electronic communication” except where the communication was “readily accessible to the general public.” However, Congress defined “readily accessible to the general public” not in the context of all electronic communication, but instead only with respect to “radio communication.” In Google’s view, radio communication applies to all communication relying on the medium of radio waves. Plaintiffs argued a decidedly narrower view, suggesting instead the term covered only the method of using radio for traditional services. Finding the expression ambiguous, and deriving only indirect assistance from similar provisions (the Wiretap Act at various points identifies “oral communication” and “wire communication”), the court ultimately turned to legislative history to resolve this method-or-medium disagreement. The Court held that Congress intended the expression “radio communication” be construed narrowly; the wiretapping exception was created to protect radio hobbyists, and noticeably declined to extend that protection to wireless telephony. (Yes: cell phones existed in 1986.) Finding that wireless networks more closely resembled cellular networks than amateur radio, the Court held that the Wiretap Act’s carveout for the interception of communications “readily accessible to the general public” does not extend to WiFi networks.

The decision is the first domestic decision addressing the applicability of certain Wiretap Act exceptions to WiFi networks. The court also dismissed a host of state claims against Google, and has yet to decide whether to certify a class of plaintiffs complaining Google breached their privacy. One thing is clear: WiFi network security requires more than passing attention.

UPDATE (7/22/2011): Tapping the breaks? The district court has granted parties leave to appeal its recent decision not to grant Google’s motion to dismiss. That decision gives the Ninth Circuit an opportunity to decide the proper scope of exceptions to The Wiretap Act before litigation continues.

July 08, 2011

The NAD (along with the FTC) continues its emphasis on weight loss claims. A recent NAD decision highlights the NAD initiative with the Council for Responsible Nutrition to expand NAD’s review of dietary supplement advertising claims. NAD launched an inquiry into advertisements made by New Nordic US Inc. concerning its Mulberry Zuccarin dietary supplement. The company’s advertisements claimed, among other things, that the supplement stabilized blood sugar levels, helped over 1,500 customers lose weight, and assisted an individual in losing six dress sizes.

New Nordic agreed that its claim that “1,500 customers lost weight” was not supported by the “level of scientific evidence consistent with other allowable claims reviewed in previous NAD decisions.” Consequently, it agreed to discontinue its use of the statement until it could establish sufficient evidence. The company, however, cited several studies and other evidence as support for its other claims.

Consistent with the FTC’s recent fine tuning to its competent and reliable scientific evidence standard, the NAD looked at New Nordic’s studies with a jaundiced eye, noting that they were conducted on the active ingredient in the product rather than the product itself, that dosage levels were different and that many were conducted on animals rather than humans. Not surprisingly, NAD concluded that the evidence submitted was insufficient to support New Nordic’s claims and recommended that New Nordic discontinue its claims. The company agreed.

Given its partnership with the CRN, look for more dietary supplement matters to come before NAD.

July 06, 2011

In a 7-2 vote, the Supreme Court overturned California’s law banning the sale or rental of violent video games to minors and imposing a labeling requirement. The Court’s opinion, written by Justice Scalia, found that video games deserve the same protection as books, movies, and plays because they communicate ideas and social messages. Scalia’s opinion cited the many ways in which our culture has incorporated violence into art. He noted that the classic books we read to our children contain “no shortage of gore.” Cinderella’s evil stepsisters had their eyes pecked out by birds and “in the Inferno, Dante and Virgil watch corrupt politicians struggle to stay submerged beneath a lake of boiling pitch, lest they be skewered by devils above the surface.” He continued: “[R]eading Dante is unquestionably more cultured and intellectually edifying than playing Mortal Kombat. But these cultural and intellectual differences are not constitutional ones. Crudely violent video games, tawdry TV shows, and cheap novels and magazines are no less forms of speech than The Divine Comedy, and restrictions upon them must survive strict scrutiny.” The Court stated that California’s effort to ban video games is the “latest episode in a long series of failed attempts to censor violent entertainment for minors.” (There is, of course, a long history of restricting the access of minors to R-rated films, but that is a voluntary restriction imposed by the motion picture industry and theater owners rather than a statutory requirement.)

Although the Court agreed that California’s ban sought to address a legitimate and serious social problem, the Court found evidence lacking to prove that video games cause violence in children. Justice Scalia noted, that even taking California’s evidence for granted, the negative effect of video games on children’s feeling of aggression was indistinguishable from the effect produced by other media, such as cartoons. Yet, Justice Scalia continued, California has “declined to restrict Saturday morning cartoons.”

July 05, 2011

In a duo of decisions handed down last Monday, the Supreme Court held that US state courts lacked personal jurisdiction over foreign corporations that were sued for personal injuries allegedly caused by the companies’ products. The cases presented an opportunity for the Court to clarify the muddy waters of personal jurisdiction and to give multinational companies operating in the modern, global economy clearer guidance on when they can be hailed into US courts. But, no clear majority emerged on the ground rules for assessing personal jurisdiction in future cases, so the opinions leave companies largely in the dark about when personal jurisdiction will exist in any particular case. Even so, the results of the two cases -- declining to find jurisdiction -- are in line with the pro-business trend this past term and they will be useful precedent for defending products liability suits, false advertising claims and other consumer class actions involving foreign companies.